GLOBAL MARKETS

WEEKAHEAD-Distinguishing relief from enthusiasm

LONDON, Sept 7 (Reuters) - A line may have been drawn underthe seemingly endless euro crisis at long last but don't confuseinvestor relief with the "animal spirits" of the market justyet.

What Thursday's euro rescue plan from the European CentralBank does most clearly is allow investors a sharper focus onother world issues critical to the increasingly uncertain globaleconomic cycle and, as the fog lifts, allow some fundamental andcorporate analysis to replace crisis doublethink.

"This is a valuable purchase of time, even if at areasonably high price. But it won't make me buy or sellperipheral debt in Italy or Spain suddenly, for example, as itdoesn't in itself solve the underlying economic problems there,"said Jerry Webman, chief economist at New York-basedOppenheimerFunds, which manages about $176 billion of assets.

"But what (ECB chief Mario) Draghi has done by removing thethreat of an immediate meltdown is to allow investors to taketheir eyes off southern Europe for the moment and ask whatcompanies around the world are positioned to grow as of now, andlook at fundamentals again to make some investment decisions."

Corporate gems aside, the macro view certainly widens againfrom Europe over the rest of the month.

Next week alone, wobbling China offers its latest economichealth check in a hail of August data and Federal Reservepolicymakers decide whether more money printing is appropriatejust as the U.S. presidential election campaign hits top gear.

And that's not to mention the series of follow-through euroevents from Germany's court ruling on the bloc's new rescuefund, Greek bailout updates and Dutch elections.

But for markets paralyzed by the so-called "tail risk", oroutside chance, of a euro collapse over the past year, Draghi'snew government bond-buying framework dispels some of the worstnightmares of a systemic meltdown in Europe.

"The ECB has delivered what it promised. The market willeventually demand more but in the short term, it is satisfied.People are going to focus now on the U.S. election and fiscalissues, and whether we will get QE," said Murat Toprak, emergingmarkets strategist at HSBC in London.

Cumulative asset price moves since Draghi first mooted theECB plan on July 26 is testament to the extent of this relief.

World stock markets have rallied more than 8percent to four-month peaks, with euro stocks booming almost 20 percent to their highest since March and theeuro currency up more than 4 percent on the dollar.

More specifically, Spanish two-year government bond yieldshave been crushed by four full percentage points to less than 3percent. Italian two-year bond yields are down almost 3percentage points to 2.4 percent.

GAME OVER?

So, game over for fearful world investors? Well, not quite.

"The big game changer was July 26 as the market has simplybeen pricing huge euro tail risk that the ECB has now cut down,"said William de Vijlder, Chief Investment Officer at BNP ParibasInvestment Partners - which has total assets of 513 billioneuros ($651 billion) under management.

"What we've done is to move from an inherently unstableinvestment regime into one that is still very challenging but atleast we can see a point on the horizon where stabilityreturns."

Perhaps the biggest test of that will be auctions next weekof the key safe-haven investments, 10-year U.S. Treasury bondsand five-year German bunds, where yields have been creepinghigher of late.

But de Vijlder said that while his funds might now playSpanish or Italian assets tactically, they would not yetconsider structural overweights and the firm had not increasedits overall global risk budget.

"For that we need to see a change in the cyclical pictureworldwide."

Next week could tell us quite a bit on that score.

The pulse of China's economy will be recorded on Sunday andMonday with a slew of inflation, industrial, retail and tradedata for August. The U.S. equivalent of August inflation,industrial and retail data pops up on Friday after Thursday'sFed decision.

Reuters latest poll on Fed expectations put a 45 percentchance on a QE3 announcement this month.

Opinion polls on the outcome of November's presidentialelection are just as divided, with incumbent Democrat BarackObama neck and neck with Republican challenger Mitt Romney.

But Webman at OppenheimerFunds reckons investors areunlikely to get meaningful signals from the race or eventualwinner on the all-important fiscal policy issues until earlynext year. In the meantime, he said it would be better just tostay focused on the steady if unspectacular recovery, assumingmonetary policy supports remain in place.

With Wall Street's at four-year highs and havingrecorded its best year-to-date gains since 2003, there's noshortage of optimism on that steady recovery persisting andrecent data on housing, the service sector and consumption isencouraging.

But the August U.S. employment report on Friday showed alower-than-expected 96,000 increase in payrolls during themonth, reinforcing the picture of underwhelming growth at best.

"I'm a believer in a sustainable but weak recovery. With allthe deleveraging from the credit excesses, it's like thebiblical seven lean years following seven years of plenty. Butthings are getting better slowly," Webman said.